POROSHENKO MAKES THE BATTLE OF DONETSK AIRPORT PRECONDITION FOR NEW $50 BILLION BAILOUT — UKRAINIANS REPELLED IN BATTLE OF DAVOS

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January 21, 2015 @ 11:16 pm
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By John Helmer, Moscow

Ukrainian President Petro Poroshenko has told the International Monetary Fund (IMF) that his government cannot raise bilateral financing from the European Union (EU) or the NATO allies, and now requires $50 billion, triple the $17 billion agreed with the IMF last April.

At a meeting on Wednesday in Davos, Switzerland, with an IMF delegation headed by managing director Christine Lagarde (lead image), Poroshenko, his finance minister, Natalie Jaresko (2nd from left) and National Bank of Ukraine Governor Valeriya Gontareva (1st left), also disclosed that Kiev will default on repayment of its sovereign bonds unless there is an immediate agreement from the US-based Franklin Templeton group and other bondholders to accept a moratorium on their coupon payments and postponement of bond maturities for several years.

Lagarde announced[1] that the terms of the current IMF staff mission in Kiev, which arrived on January 8 under former Bulgarian finance official Nikolai Gueorguiev, should now be revised.

Gueorguiev had been planning to return to Washington on January 29. His technical report estimating the Ukrainian government’s cashflow, liabilities, repayment shortfall, and solvency was due to be submitted to the IMF board in early February; it must now be redrafted. “We will consult with the IMF Executive Board on the authorities’ request,” the IMF quoted Lagarde as saying. “Following the Executive Board’s agreement to proceed, the Fund mission currently in Kyiv would begin [sic] discussing the policy program underpinning the authorities’ request.” IMF sources admit that Gueorguiev will be staying in Kiev into February. Gueorguiev refuses to respond to emailed questions.

In mid-December the IMF admitted its money for Ukraine under the Stand-By Arrangement (SBA) of last May had been suspended until “technical discussions” were followed by “policy discussions”. Altogether, converting IMF Special Drawing Rights (SDRs) into US dollars, about $6 billion in three tranches have been withheld since last July. Last month, Ukrainian Prime Minister Arseny Yatseniuk called for an unconditional cash grant of $15 billion. This was not accepted in the discussions conducted by Gueorguiev, according to Fund insiders. For the full story, read this[2].

In December, William Murray, Lagarde’s spokesman, insisted that if Ukraine wanted extra money without conditions, it had to get it from “the donor community”. Lagarde and Poroshenko have now agreed to reopen “policy discussions” on who the donors might be.

Sources close to the IMF board in Washington reveal fresh dismay at the loss of Poroshenko’s power to meet the IMF’s loan conditions. The sources say this is indicated by Poroshenko’s appointment last week of Stepan Kubiv (right foreground). He is now in charge of promoting the IMF loan conditions through the Verkhovna Rada. Kubiv, whose controversial career as a banker in western Ukraine, was ended by
Polish banking authorities, headed the National Bank of Ukraine between the ouster of President Victor Yanukovich last February, and the election of Poroshenko at the end of May. Kubiv’s record can be read here[3].

Gontareva[4] was Poroshenko’s replacement for Kubiv. Pictured wearing fur cuffs at the meeting with Lagarde, Gontareva has been under attack in the Ukrainian press and parliament for incompetent handling of the foreign exchange rate, which has sunk in black market trading to 20UAH to the US dollar. The official rate on December 1 was 15.06. Since then Gontareva has been under pressure from several factions of the Verkhovna Rada to resign[5]. With the stress now physically visible, Gontareva has told parliament the hryvnia will continue to fall until the IMF agrees to triple the bailout. A Kiev district court has ordered prosecutors to investigate[6] Gontareva’s currency interventions for alleged corruption.

In London Neil Buckley, a Financial Times reporter, claims[7] Lagarde has said: “I will propose to support it”, meaning the triple bailout. According to the IMF, Lagarde supports taking the proposal to the Fund board, no more. Buckley has tweeted[8] the advice that “bondholders shd be flexible”, and that the triple bailout will “help fend off Russia’s attempts to create financial havoc.”

Jaresko has issued her own communique, claiming the $50 billion “Extended Fund Facility” (EFF) is “for the next four years , which will allow Ukraine to return to economic growth , to restore an adequate level of foreign exchange reserves and to ensure economic and financial stability in the future.” She acknowledged the Finance Ministry is “consulting with the owners of Ukrainian sovereign debt to improve medium-term fiscal stability. As soon as arrangements could [sic] be achieved with the IMF , the Ukrainian government will take further steps in consultations with its creditors.”

Until today Jaresko has insisted the government in Kiev would not default on its bonds. She is now making the triple bailout a precondition for a deal with bondholders. After meeting Lagarde, Jaresko claimed foggily: “The markets expect this step. They should be welcomed to accept it.” Jaresko’s record can be followed here[9].

The senior US official in charge of saving Ukraine from financial collapse, Nathan Sheets (right), a Treasury undersecretary, on his visit to Kiev last week, described US terms as more stringent than the State Department and White House have been broadcasting. According to Sheets, the US will hold on to its loan guarantee for Ukraine of $1 billion until Poroshenko can meet the IMF conditions. The Treasury is promising another $1 billion in loan guarantee by year’s end if the Ukrainians can demonstrate good behaviour while on parole. “As part of the international effort, the United States intends to provide a $1 billion loan guarantee to the Government of Ukraine in the first half of 2015, provided Ukraine remains on-track with the reform program it has agreed with the International Monetary Fund (IMF). If Ukraine continues making concrete progress on its reform agenda and if conditions warrant, the U.S. Administration will be willing, working with Congress, to provide an additional $1 billion loan guarantee[10] in late 2015″.

The day before he met with Sheets, the Ukrainian Minister of Economic Development Aivaras Abromavicius (below right) reported that he had asked George Soros (left) for advice on tripling the bailout. Soros told him to get the money from the EU and avoid the IMF.

Soros has called[11] for intensifying the war with Russia and removing the IMF’s reform and repayability conditions for the bailout. “Since Ukraine has had a poor track record with previous IMF programs, the official lenders insisted that Ukraine should receive assistance only as a reward for clear evidence of deep structural reform, not as an inducement to undertake these reforms… This perspective needs to be altered.”

Soros told Kiev to sidestep the IMF terms and conditions. He is proposing to raise “ the large unused borrowing capacity of the EU itself and find other unorthodox sources to be able to offer Ukraine a larger financial package than the one currently contemplated.” Soros counts $64.3 billion of unused EU funds available for the Ukrainians to spend. “[They] are currently limited to EU member states but could be used to support Ukraine by modifying their respective regulations by a qualified majority upon a proposal by the European Commission.” An IMF rubber-stamp should be preserved, according to the Soros plan: “[the Fund] would remain in charge of actual disbursements, so there would be no loss of control.”

Soros has also proposed avoiding a bond default by asking the mostly American bondholders to accept a stretch-out of their paper maturities in exchange for higher interest rates and larger coupon payments to be covered by the extra cash he thinks the EU should stump up.

Instead of defaulting on the $3 billion bond the Ukraine owes for repayment to Russia this year, Soros says the Kremlin should be given an ultimatum – either accept rescheduling, or if not, the bond contract should be repudiated. “Russia may be willing to reschedule the payments by Ukraine on the bond voluntarily in order to earn favorable points for an eventual relaxation of the sanctions against it. Alternatively, the bond may be classified as government-to-government debt, restructured by the group of nations officially called the Paris Club, in order to insulate the rest of Ukrainian bonds from their cross-default provisions.”

In Kiev on January 15 Poroshenko and Soros agreed to discuss his plan once more in Davos. Sources in Davos claim Soros was represented at today’s meeting of Ukrainian and IMF officials, sitting on the Ukrainian side. Accompanying Lagarde were Gilles Bauche, a veteran French Treasury operative, and Gerry Rice, head of Communications at the IMF. Lagarde’s office refuses to identify the figure with the military crewcut in the foreground (right).

So far, the European governments are unwilling to support the Soros proposals. They are insisting the terms for a bailout must be negotiated with the IMF, and voted by the board. The Polish Prime Minister, Ewa Kopacz – just four months into her term, with an election due in October — has just announced a Polish government loan of €100 million to Ukraine. The small print restricts the payout to instalments of no larger than €10 million per annum over a decade, with performance conditions besides. The announcement is unpopular with Polish voters.

The Polish blog says: “ We have no money to save the Polish coal industry. 100 million Euro for Ukraine? No problem!”

Russian sources believe Poroshenko and Yatseniuk have calculated that the escalation of fighting along the line of contact in eastern Ukraine, and at Donetsk, would improve their international bargaining position, win or lose. The loss has proved more severe than expected.

After two weeks of silence from the State Department during the arms buildup on both sides of the line, the Department briefer announced[12] yesterday that the Russians were to blame. “There has been… an increase in separatist violence, including renewed attacks on the Donetsk airport in recent days, and separatist seizures of more territory. We’ve also seen reports that two tactical battalions – Russian tactical – Russia has moved two tactical battalions into Ukraine. I don’t have additional information or independent confirmation of that.”

The defeat of the Ukrainian Army at Donetsk airport has come after days of artillery bombardment, aerial bombing, and an attempted breakthrough by the Army’s 93rd Mechanized Brigade to recover the New Terminal which was lost on Saturday.

Colonel Oleg Mikats, the brigade commander, has been captured (below left, before; after, right front). His unit, which has a nominal strength of 3,000, has been destroyed. A large stock of US arms, ammunition and explosives has been captured from the Ukrainian Army and displayed on Novorussian media.

The Novorussian media are predicting that if the Ukrainian Air force continues to bomb civilian targets in Donetsk and Lugansk from bombers, the “Novorussian air force” will rise to stop them. The Special Monitoring Mission (SMM) of the Organization for Security and Cooperation in Europe (OSCE), has been unable to report on the airport battle.

From Donetsk city the latest SMM report[13] says it “observed substantial damage of civilian infrastructure in “DPR”-controlled Donetsk city and surroundings as a result of recent intensified shelling over the last 48 hours. In the DPR-controlled districts of Kyivski (8 km north-west of Donetsk), Kirovskyi (7 km south-west of Donetsk), Petroveski (9 km south-west of Donetsk) and Voroshilovski (1 km north of Donetsk) the SMM observed damage to civilian buildings caused by recent shelling. The SMM also observed a crater with remnants of what appeared to be a (Uragan) multiple launch rocket system that had resulted in damage to a number of buildings… Damage to civilian infrastructure due to what appeared to be Smerch multiple rocket launchers (300mm) and Grad (122mm) rocket strikes was observed by the SMM. Most of the damage consisted of broken windows, felled trees and downed power lines.”

Before the defeat, the Financial Times described[14] the battle for Donetsk airport as strategic. “Losing it would be a crushing blow to Ukrainian morale”, the newspaper has declared. In his plan, Soros says, the military operations demonstrate that “Europe needs to wake up and recognize that it is under attack from Russia.”